Backed by the continued popularity of Alibaba's Jack Ma, the Beijing's IT sector saw strong momentum during the quarter, allowing Zhongguancun rental growth to outperform all other submarkets. In 2Q15, several firms signed on for space, joining the ranks of Tencent and Sina in China's Silicon Valley and significantly driving up rental growth to 3.6% q-o-q. Rents in Zhongguancun are also expected to surpass the Third Embassy area in the near future. Reinforced by the success stories of entrepreneurs like Jack Ma, IT demand continues to be strong. "Zhongguancun is red-hot," said Eric Hirsch, Head of Markets for JLL in Beijing. "Beijing's growing IT sector and its office demand are further supported by all the young, bright-eyed Chinese entrepreneurs here aspiring to be the next Jack Ma."

Beijing rents continued to see upward momentum overall, meanwhile, with 1.1% q-o-q growth in 2Q15, marking the market's seventh consecutive quarter of rental growth. In addition to Zhongguancun, CBD rents contributed to the rise, accelerating by 1.0% q-o-q due to limited spatial availability in the market. With 3.4% q-o-q rental growth, East Chang'an also played its part as landlords at key projects raised rents. "The tight vacancy environment in Beijing has enabled landlords to leverage every opportunity to raise rents, and barring anything unforeseeable, they are likely to continue to do so," Hirsch added.

Investments

Investors are showing interest in well-located office buildings in mature office areas, including the CBD. Beijing's stable office yield continued to hold up well against other Tier 1 city office markets in the quarter. And while en bloc sales prices of Beijing office towers remained similar to those of rival cities like Shanghai, Beijing remained attractive to investors because of its higher average market rents, which are only projected to further climb. "From an investor point-of-view, it's all very enticing," said Kevin Qin, Head of Capital Markets for JLL North China. "Given the strong demand story and simpler asset management, Beijing office buildings continue to be the preferred asset class among investors."

Market movers are carefully considering cash-rich equity partners who can share high cost-burdens, especially as land prices continue to climb. Liquidity-strapped State-owned enterprises (SOEs) continue to be major players in the Beijing office market. However, these players remain unwilling to release their core properties to relieve cash-flow pressures, given the high long term-holding value of these assets. Therefore, as they seek to build up land banks and fund future development, local developers are increasingly looking to align with financially viable institutional investors. "Considering that land pursuits in Beijing, particularly within central areas, will only require greater amounts of capital due to rising prices, we're likely to see more of these partnerships forming on the horizon," added Qin. "SOEs wanting to move forward on strategic land banking will need to become more reliant on external funding sources; such new alliances could give institutional investors better opportunities to gain market exposure."

Prime Retail

Three new, large-scale projects opened in the Suburban market, further extending the supply boom that began in late 2014. Fun Mix was off to an impressive start with 90% commitment and 80% physical occupancy. Chengxiang Century Plaza, an unusually large department store with the resemblance of a shopping mall, also entered the market. Badaling Premier Outlet entered, offering international and domestic luxury, and premium brands in Changping. The 220,000 sqm-retail development achieved 85% commitment and 70% physical occupancy on opening day. "Badaling Premier Outlet brings the level of competition in the emerging Suburban market to the next stage, especially at a time when consumers have become more price-sensitive than ever," said Steven McCord, Head of Research for North China and Lead Retail Analyst for China, at JLL in Beijing. "Customers increasingly want to drive to somewhere that allows them to shop for well-priced, quality merchandise in a comfortable environment, and for the right customer, this project speaks to that."

As rental declines at weak properties cancelled out the gains made by market-leading projects, rental growth significantly slowed in the quarter. Small, newer, and centrally located projects which started with high positioning targets have been slow to fill up, and in some cases, such properties have had to lower rents to attract tenants. The trend contributed to slower rental growth in the Urban market, which registered just a slight rise of 0.4% q-o-q; Core projects (high profile, premium projects) marginally outperformed at 0.7% q-o-q. "Discrepancies between strong and weak projects are becoming more apparent as competition heightens in the market," McCord added. "Market winners will continue to separate themselves from the pack of low-quality mall projects and be the main driver of rental growth over the forecast horizon."

Prime Industrial

Demand from multiple tenant types gave a big boost to net take-up in the quarter, with absorption more than doubling q-o-q to 52,000 sqm. Several tenants filled the large, vacant space in Daxing, with the majority of demand coming from manufacturing, bricks-and-motar retailers, and small e-commerce firms. Unlike previous quarters, third party logistics companies were quiet in 2Q15, but that was down to the lack of large, available space in the market, not waning demand. "Diversified tenant-demand helped continuedpushed vacancy down to just 4% at end-2Q15, further contracting the tight market," said Sharon Luo, Head of Industrial at JLL in Beijing. "While 3PLs and courier companies, in particular, remain highly interested in leasing space, they will continue to run into trouble finding something suitable until late this year, when the market is expected to get some relief from new supply."

The tight vacancy setting helped rents modestly rise. Limited leasable space meant that reputable developers were able to raise rents at every chance, pushing rental growth up slightly, to 0.6% q-o-q. "The current situation is still favourable to investors, but the lack of available properties on the market resulted in no en bloc transactions for a fourth consecutive quarter," Luo added. "As investors choose to hold on to their properties for longer, tradable assets will continue to be hard to come by, and therefore, we expect the situation to change little over the next while."

High-end Residential

Supported by further policy loosening in the housing market, sales for both primary luxury apartments and high-end villas rose sharply to 611 units and 176 units in 2Q15, up a significant 58% q-o-q and 66% q-o-q. "Proactive credit policies, such as additional cuts to the lending rate and deposit rate, have helped high-end apartment and villa sales rebound quickly and should continue to do so until the end of the year," said Steven McCord, Head of Research for North China at JLL in Beijing. "Therefore, we expect to see more buyers return to the market in the second half of the year."

The sales volume for the high-end market is expected to be strong under stable sales demand. Under the relaxed policy setting, current sales volume levels are projected to see modest gains. Although fierce competition is expected to weigh on prices, reputable developers are still expected to be able to sell quality units at high prices.

Tongzhou:

The municipal government move to Tongzhou will help kick-start the development of a new satellite city CBD. Among Beijing's satellite cities, Tongzhou is closest to the city centre, and Chaoyang District in particular, where the majority of Grade A office buildings and retail projects in the capital are located. Best-connected to surrounding Hebei Province and Tianjin, Tongzhou is also well-positioned to facilitate citywide and regional integration, and the city's expansion of urban rail means that a move to the area is more practically feasible than in the past. "In this regard, Tongzhou is strategically situated to emerge as a low-cost alternative for office tenants wanting large spaces still within convenient reach of the city, while also appealing to tenants working in both Beijing and Hebei." said Steven McCord, Head of Research for North China at JLL in Beijing. "Already popular with white-collar workers who have purchased homes within commuting distance of eastern Beijing, suppliers, contractors, and firms would follow as part of the knock-on effect, helping to build up the area.

"High-end residential, on the other hand, would unlikely take off until better social services, particularly health and education, are established in Tongzhou," McCord added.

Stock Market:

Despite drastic plunges in the China stock market in recent weeks, the overall immediate impact on real estate is not expected to be large.

Office: The number of small wealth management firms and stock brokerages in the Grade A office market is small enough not to have a big effect on the market. Based on our surveys, small Chinese finance firms account for roughly 70,000 sqm in the Grade A leasing market – or approximately 2% of the total occupied area. In the worst case scenario, if all of these firms closed, we would only see a 2 percentage point increase in the Grade A vacancy rate in Beijing. Given the tight market, companies from other fast-growing industries, especially IT, would quickly lease up the vacated space. The bigger concern is in Tier 2 markets where wealth management firms are often one of the only sources of Grade A office demand. Beijing's market, however, enjoys far more diversity in demand sources.

Residential: Given the high home ownership rate in Beijing, most people's wealth lies in their homes, not the stock market. We expect that the number of potential buyers will be reduced as some buyers postpone purchase plans or purchase a smaller unit. Buyers who were waiting on the side-lines may now find it harder to return to the residential market. Smaller cities, meanwhile, are more sensitive to ups and downs in investor demand and may see a greater response to the stock market slide than Beijing. Meanwhile, we believe that the average high-end buyer does not have an out-sized exposure to the domestic equities market, as they are better diversified across asset classes and are less affected by the slump.

Investments: Developers who were able to raise capital during the peak months did well and were able to obtain easy financing. However, those who did not take advantage of the stock surge to raise capital failed to reap the same benefits and will not have the cushion that others do now, and therefore, may have less available capital to continue building up land banks.

Retail: The consumer confidence index has in recent years shown a lot of volatility based on a number of much smaller events than this, and therefore, the effect on consumer confidence is not expected to be an unprecedented shock. That being said, we can expect to see more big ticket items being put on hold. E-commerce is likely to be less affected, given that many consumers online already shop for the lowest prices .